Handbook of Exchange Rates

6.7 Analysis of U.S. Return to Gold Standard in 1879

The successful PPP testing for the greenback period, on the part of Kindahl (1972) and Officer (2005), was based (wholly, for Kindahl; in part, for Officer) on real-exchange-rate computations. These authors put their computations to work to determine (i) the range of real appreciation of the greenback for successful return to the gold standard and (ii) the first year in which a successful return could occur. For (i), the technique was simply to observe the range of the real exchange rate in the postbellum period but excluding 1877–1879, which were years of unusual capital outflow. The resulting range for Kindahl was 9–27% or 8–18%; for Officer, −3 to 18%—all assuming no capital movements. If resumption was to occur at the prewar parity (as in fact did happen), then the U.S. price index could exceed the U.K. price index by a value within the specified range (with both indexes relative to base year 1860). With capital inflow, the real exchange rate (or PPP, with no change in the nominal exchange rate) could exceed the upper limit. With capital outflow, it might have to fall below the lower limit.

To answer (ii), one approach is to find the earliest year in which the real exchange rate falls within the estimated range; but the range might be considered too broad for a confident return and maintenance of the gold standard. Consider, rather, a stronger criterion: the earliest year at which the real exchange rate reached (or almost ...